Euro starting to weigh on corporate profitability

Bloomberg has a good story this morning on how a strong euro is now forcing automakers such as Peugeot and Fiat to cut their year-end profit targets. Nothing is ever easy is it? European growth improves and now a strong euro might kick things into reverse. The ECB should take note. Europe is becoming Japan and the periphery is paying the price (deflation) for the its reward (a balanced or even positive current account). However, this position will consistently come under pressure if and when the EUR appreciates.

There is an interesting story this morning on Bloomberg about the travails of European automakers and the strong euro. According to Bloomberg, the already troubled French automaker Peugeot will take a €1.1 bn non-cash charge due to adverse currency fluctuations in Russia and Latin America. In Italy, the country’s biggest automaker Fiat has cut its year-end profit target by 13% to take into account currency movements.

Nothing comes for free and with the eurozone periphery deflating its way to a currency account surplus the aggregate external balance of the euro area has increased to its highest level ever at more than 2% of GDP. Coupled with tighter liquidity (less euros sloshing around), improved sentiment and repatriation ahead of AQR* the EUR has seen strong support this year.